Mortgage firm has good model for subprime lending

Here's some sound advice for anyone in the market for a mortgage: Before signing on the dotted line, check out the competition to see if they can beat the terms you've been offered.

And it doesn't come from me or another consumer advocate. It comes from Ameriquest Mortgage, a subprime lender based in Orange, Calif., that makes loans to people in 46 states who have tarnished credit histories and can't qualify for the best rates in town.

It's sort of like a salesperson at Macy's sending someone to Gimbels. Or, for you younger folk, someone at Home Depot sending a customer to Lowes. But there it is in black and white: "Consult with other lenders, including banks and savings and loans, to confirm the terms we offer are acceptable to you." The nation's largest subprime lender includes the suggestion in a letter explaining the loan process. Every one of the company's potential customers receives one when they apply for a mortgage.

Would-be borrowers are also warned not to be rushed, not to rely on any representation that's not in writing and not to sign anything until they have received an explanation they understand. "Do not let anyone pressure you into obtaining a loan," the letter reads.

At a time when the terms "subprime" and "predatory" have become synonymous, the easy-to-understand letter stands as testimony that not every company that lends money to people with lousy credit or no credit is a predator. Indeed, many serve this market honestly and fairly.

Granted, this company is more enlightened than most. But without lenders who are willing to make credit available to higher-risk borrowers, these folks would have nowhere else to turn than loan sharks or finance companies, for money to buy or fix their houses.

Now Ameriquest hasn't always been so forthright. But it didn't have to be dragged kicking and screaming into becoming a straight shooter, either. It was already part way there when the people from the Association of Community Action for Reform (ACORN) came calling a few years ago. ACORN is a nationally recognized organization on the forefront of the effort to make affordable credit available to lower-income and minority neighborhoods.

As Michael Shea, executive director of ACORN Housing recalls it, after several members complained about Ameriquest, his group launched a "series of direct actions" against the big lender. But instead of crying foul or initiating a counterattack, the firm responded by agreeing to discuss the situation with its adversaries.

"ACORN may be a household name, but we didn't know who they were," says Adam Bass, Ameriquest's general counsel and senior executive vice president. "So we decided to sit down with them and really try to understand where they were coming from."

Both men agree the meetings were profitable for both sides. "We got an entirely different perspective from them. We ended up using a lot of the language they wanted us to," says Bass. And according to Shea, Ameriquest "taught us a few things, too."

It's a process all subprime lenders would do well to emulate, says Howard Glaser, chief lobbyist for the Mortgage Bankers Association, one of several trade organizations trying to beat back legislation they believe would keep their members from meeting the needs of underserved borrowers. "Every company needs to look internally," Glaser says.

As it turned out, Ameriquest didn't have that far to go. It didn't engage in any of the unscrupulous practices that are the hallmark of true predatory lenders: baiting-and-switching, knowingly making unpayable loans that almost assuredly will result in default and foreclosure and packing single-premium credit life insurance coverage into the loan amount.

The company said it didn't target potential borrowers by race, either. All solicitations were based on credit score, high-interest-rate loans, negative amortization loans and balloon payment loans, although they are entirely legal and not necessarily abusive. And it didn't require arbitration clauses or try to influence appraisers. But it did require fully disclosed prepayment penalties. Though community activists have vilified the use of such fines, lenders maintain that they help keep loan costs down.

By agreeing not to pay off their loans for the first several years, lenders explain, borrowers are allowing them enough time to recoup their costs. Without such a guarantee, rates and other fees would have to be higher in order for lenders to cover their expenses.

Figures provided by Ameriquest tend to back that theory: The average rate on the firm's $8 billion in mortgages is 9.75 percent, about 2.5 percentage points greater than the market rate for borrowers with solid credit and a far cry from the rates predators charge.